Sinovac Biotech Ltd (SVA) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Sinovac Biotech Limited third quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Stephanie Carrington of the Ruth Group. Thank you, Miss Carrington. You may now begin.

Thank you, operator. Good day, everyone. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements. These statements are made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by words or phrases such as will, expect, anticipate, future, intends, plans, believes, estimates and similar statements. These statements are not historical facts, including statements about Sinovac's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties.

A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Sinovac does not undertake any obligation to update any forward-looking statements except as required under applicable laws.

On the call today from management are Dr. Weidong Yin, CEO; Ms. Nan Wang, Interim Chief Financial Officer; Ms. Helen Yang, Investor Relations Manager; Ms. Vanessa Wu, Senior Financial Manager; and Ms. Chris Lee, Investor Relations.

I will now turn the line over to Helen Yang. Go ahead, Helen.

Thank you, Stephanie; and hello, everyone. Thank you for joining us on this conference call. On the call today are Sinovac's Chairman, Dr. Weidong Yin; and our interim CFO, Nan Wang. I will provide an update on the business on behalf of Dr. Yin, and also financial reviews of our third-quarter results.

Let me start firstly by elaborating on the phase 2 clinical results for our inactivated vaccine against hand, foot and mouth disease caused by enterovirus 71, or EV71, that we recently reported. Advancing the clinical development of our EV71 vaccine is one of the top priorities at Sinovac, given the significant unmet medical needs that hand, foot and mouth disease represent across Asia given the increased number of pediatric fatalities in the recent years.

The preliminary phase 2 results showed a good immunogenicity and a favorable safety profile, with no vaccine-related serious adverse events. And there is no significant differences on the adverse reaction rate between the vaccine group and control group.

The phase 2 trial was a single-center, randomized, double-blind and placebo-controlled study. 540 healthy volunteers comprised of infants from six months to 35 months old were enrolled. The phase 2 results provided reference data for phase 3 clinical trials, including the vaccination schedule and dosage selection, based on which the proper dosage can be selected to enter into the phase 3 clinical trials.

Currently, the statistical experts are analyzing the data, and detailed results are anticipated to be available in the coming weeks. We commence preparation for the phase 3 clinical studies, including the phase 3 trial protocol clinical site selection. And also, we are preparing for manufacturing the vaccines for the use in the phase 3 clinical studies. We anticipate commencing the phase 3 trial in the coming months, and we aim to complete the whole phase 3 trial within one year.

In parallel to the clinical development, our engineering team is working on setting up a dedicated manufacturing facility for its EV71 vaccine, and aim to complete the construction and GMP certification in the year of 2013.

Transitioning to our commercialized vaccines, we are seeing continued demand for our hepatitis vaccines, contributing about two-thirds of the sales in this quarter. We are continuing to leverage our sales and marketing experience in the private pay market to expand our sales.

Bilive, [purely] sold in the private pay market, in the third quarter, experienced a significant growth. And also recently, these vaccines went through a pricing increase, which contributed high sales growth in this quarter.

And on the other hand, we are also making significant progress in growing public market sales of our Healive, which represents 24% of total third quarter sales compared to only 8% in the same period of last year.

And we were selected by the Beijing CDC for the fourth time as one of the four manufacturers to supply the seasonal flu vaccine to their citizens. And this is also included about the sales to the public market as well.

And next, we will turn to the progress that we are making on our animal rabies vaccine that was approved two months ago. Our Tangshan Yian production facility is currently fully operational, and the first few batches of animal rabies vaccine have been released by Chinese Institute of Veterinary Drug Control, the national laboratory of animal drugs, which are ready for sale.

We have established a dedicated sales force, and are teaming up with the distributors to make this inactivated animal rabies vaccine available to pet owners through the animal CDCs and pet hospitals. The team is actively working on exploiting the public market, and also selecting the regional distributor to expand the private market for our animal rabies vaccine.

Turning to the international market expansion, we have submitted the supplementary documents required by the local Mexican authorities after obtaining the Mexican GMP certificate in August. We are keeping in close contact with our distributor in Mexico, and we anticipate obtaining the certificate of final approval for our Anflu in the coming months, as we are seeking to commercially launch the vaccine in Mexico next year.

We look forward to anticipating in the government tender process, as well as generating private market sales in collaboration with our partner in Mexico. And we're also actively working with our distributor in the Philippines and Mongolia, aiming to obtain further orders for our both hepatitis A vaccine and the influenza vaccine.

And next, I also want to talk about a most recent update on Chinese vaccine industry. On October 26, 2001, the State Council of China approved a plan to create a national vaccine supply system in order to boost the country's ability to prepare for, and also to cope with epidemic emergencies. And according to the plan, by year of 2020, the vaccine supply system shall be further improved and expanded to provide China with the preparedness level for epidemic emergencies that are the same level as the developed countries.

And this means that the vaccine supply and emergency preparedness has been elevated to a national priority. And this represents a very favorable development for the entire vaccine industry in China. The plan also indicated that vaccine inoculation represents the most effective and economical way to prevent infectious disease and control the epidemic situation on a national level, thus clearly defining the strategic national importance of vaccine stockpiling and a critical role that the domestic industry plays.

Moreover, according to the preliminary plan as outlined, the Chinese Government will support entrepreneurs, and companies qualified R&D capabilities in order to advance vaccine research and development. They are especially focused on the development and commercialization of a few urgently needed vaccines, including a vaccine against hand, foot and mouth disease, for which Sinovac is one of the three domestic companies with a vaccine under development.

Due to the current epidemic situation for hand, foot and mouth disease in China, the plan particularly indicated its support to enhance the R&D of hand, foot and mouth vaccine. Currently, the official [type] of the plan hasn't been published yet, but a positive attitude and clearly support to the urgently needed and innovative actions were encouraged -- will be encouraged.

In addition to fully acknowledging on the strategic national importance of vaccine utilization, the plan also sets forth higher requirements for the vaccine quality and a quality control system. We believe Sinovac, with its core manufacturing expertise and commitment to providing high quality vaccine products to the population in China and globally, will certainly benefit.

Our focus on driving sales in the private pay and the public market in China is yielding a positive sales result in the most recent quarter. So now let's look at our third quarter financials.

Our sales for the third quarter 2011 were $15.4 million, up 60.8% from $9.6 million for the third quarter of 2010, the sales revenue also including 10% of sales return provision on our flu vaccine.

The third quarter 2011, our hepatitis A vaccine sales also included delivery of over 500,000 doses of Healive to Xinjiang CDC, which -- for which order we received in July 2011. The quarter-on-quarter sales increase was driven by the significant growth of Bilive sales to the public market, and Healive sales to the public market.

Gross profit for the third quarter 2011 was $8.7 million, with a gross margin of 56.8%, compared to $6.5 million, and a gross margin of 68.3% for the same period of 2010. After deducting depreciation of land use rights, amortization of licenses, permits, the gross margin was 56.5% and 67.2% for the third quarter of 2011 and 2010 respectively.

The lower gross profit was adversely impacted by the lower than average selling price of hepatitis A vaccine, while we'll aim to expand the public market for our hep A sales. And also, the lower plant utilization, inventory provision and write-off of our hepatitis vaccine in third quarter this year also contributed to the lower gross margin.

The total operating expenses for the third quarter of 2011 were $11.4 million compared to $7.2 million in the comparative period of last year. The increase of operating expense was mainly caused by the increases of selling -- SG&A expenses.

The operating loss for the three months ended September 30, 2011, was $2.7 million, compared to $670,000 for the same period of the prior year. The increase in operating expenses and the change in operating loss was attributable in part to our investment in building a more effective sales team for existing and new products in both private pay market and public market. And also, the increased marketing expense in the private pay market also contributed to a high selling expense.

Net loss attributable to shareholders for the third quarter 2011 was $2.1 million, or $0.04 per diluted share, as compared to $298,000 or $0.01 per diluted share in the same period last year.

As of September 30, 2011, Sinovac's cash and cash equivalents and short-term investments totaled $94.2 million compared to $103.1 million at December 31, 2010.

And the capital expenditure for our Changping site is about $15 million, which is the biggest part of capital expenditure for the Company. And this Changping site will include the construction of a new EV71 facility, and also a new fitting and packaging line, and also other supporting facilities like utility facilities.

And we have spent less than half of this amount, and we believe the cash we have is sufficient to support the planned investment. And also, Sinovac in China do have a very good relationship with the local commercial banks, which also will be the supporting source of financing to support our capital expenditure.

And in the first nine months, our sales revenue is about $35.7 million, and this amount of revenue includes $7.7 million of H5N1 revenue recognition.

And for the detailed financials, you can actually refer to the press release which was sent out one hour ago. And the management expect in this year to realize

And in addition to that, if we are able to complete a cost audit for the 8.7 million doses of H1N1 vaccines stockpiled by the Chinese Government previously, we are able to recognize additional revenue of $17 million, which makes the total revenue in the range of $55 million to $57 million.

So before turning over the line to questions, we would like to say that we look forward to seeing some of you at the investor conferences in the coming week.

Tomorrow, management will be presenting on the pharmaceutical panel at a Cowen's China opportunity conference in Beijing. In addition, we will be presenting at the Piper Jaffray healthcare conference in New York City November 30.

And that concludes the presentation from the management. Operator, we are now open to take questions. Thank you.

(Operator Instructions). [Hau Ju], Piper Jaffray.

This is [Abbey Lee] calling on behalf of Hau Ju. I have a couple of questions to ask [about you]. First, could you give us the breakdown of your vaccine product, especially the Healive for type A and Bilive for type A plus B?

Thank you for your question. So you're asking the revenue breakdown by product?

Yes.

If you have a chance to look at our press release, we -- I think our both hep A and hep A and B sales is about $10.8 million, and the flu vaccine is about $4.6 million in this Q.

No, I mean the breakdown between the hyper vaccines; the ones for type A, between the one for A plus B.

Oh, sorry. For hep A in this quarter, our total sales revenue is $0.5 million, and hepatitis A and B is about $0.2 million.

[$5.4] million. Okay. Also, could you give us some color on the pricing of the two major products, if there's some pricing up or down of the two products?

Generally speaking -- I can answer your question first, and if any other management member wants to support on that, they can speak later on.

Actually, regarding the hepatitis A vaccine, our priority is right now is to maintain our private pay market, and also to expand the public market. And for the public market expansion in China, there is a price ceiling for the vaccine product purchased by the Government. So in general, if we go more to the public market, the average selling price will be lower compared to the private pay market.

However, on the other hand, we are also actively selling our hepatitis A and B vaccine, and recently, these vaccines are experiencing an increase in price in the past few months.

Okay. I know you mentioned for Healive the price is actually going down because of the governance, the pricing regulatory, and Bilive the price is going up. So maybe could you help us understand better maybe how much percentage was the price changing?

Sure. When we are selling to the public -- when we are selling to the private pay market, our hep A vaccines, they sell around RMB42/RMB50, depending on different type of package. But if we are moving into the public market, no matter what packages, the price varies from RMB20 to RMB32.

That's very helpful. Thanks. Also, my next question is regarding your animal rabies vaccines. We want to understand better about the sales channel of the vaccine. You mentioned in your opening remarks you will work with the CDCs and hospitals. We want to understand how many let's say provincial level or municipal level, how many CDCs or provinces are going to sell this kind of product.

Thank you. I think we recently just received the license for the animal rabies vaccine, and at this beginning period, we're also in the learning phase for understanding this industry better. But from our current knowledge is that we will not [let human] vaccines rely on our own team, but also -- but instead, we want to rely primarily with the distributor to help us sell the vaccine.

And as far as we understood, different regions do have a different way of managing the animal vaccine sales. Some of them are actually having the animal centers for disease control to actually control the distribution of animal vaccines. So in that area, we'll mainly sell to the animal CDCs.

And in the other area, the pet hospital is the main point of purchasing the animal vaccines. So in those areas, we will rely on the distributor to help us selling our animal vaccines through the pet hospital.

And also, in some southern areas, they do have local government procurement programs through a public tender, but it is not a massive activity. They just happen in some, like in South of China.

So I think our team is currently organizing the different information, and also we want to make a solid plan for our marketing. I believe that in the coming weeks or coming months, we'll have a much more solid plan to communicate with you.

Okay. So how about the pricing strategy of the animal vaccines?

Right. We think actually that is related to part of our advantages in the competition landscape. We think we will hopefully launch two different packages. One is in pre-filled syringe. Currently, all the products, including the multinationals and local vaccines, are always in vile, but we will supply the vaccine in pre-filled syringe. And this is a no-filling needle head, which is good for the animals.

So in that, we think we're pricing higher than the multinationals' products, because our vaccine is inoculated animal rabies vaccine, and we are directly competing with multinationals' products. But for our vile, vaccine in vile, also is the single -- it's a single dose file, and its pricing -- it's about similar to the imported vaccines.

And regarding to the higher priced in the pre-filled syringe, the price level is around $4 per dose. And for the vile vaccine, it's about $2 per dose.

Okay, thank you. I also have another question about your EV71 vaccine. You mentioned you -- please correct me if I were wrong. I remember you mentioning in the opening marks you want to complete the phase 3 clinical trial within a year from now on. Is that correct?

Not from now on. It's from we launched the phase 3 clinical studies.

Okay. But you were going to kick off the phase 3 clinical trial in coming months?

Yes, that's what we planned.

So is that rational? We are expecting this new product will bring you meaningful revenues, let's say starting from 2013?

Probably, if you're talking about meaningful revenues, we think probably it's not starting the beginning 2013. Because if we complete a phase 3 trial before the end of next year, we still need to take a few months to get other license in order to commercially launch the vaccine. So we think if you are talking about a meaningful revenue, probably you expect 2014 is a rational expectation.

2014?

Right.

Okay. Could you also give us some update of your pipeline research?

Oh, sure. Actually, we have about 10 programs in the pipeline, and our EV71 and pneumococcal conjugate vaccine are the two programs we highly prioritized. That's why we talk a lot about EV71.

We also actually filed the IND with Chinese SFDA for our pneumococcal conjugate vaccine, and varicella vaccine and rubella vaccine. Sorry, not varicella, it's rubella vaccine.

And also, our mumps vaccine, manufacturing on our Italian side, is in the registration process. We're upgrading our GMP to the new standards. And I think the remaining programs is right now still in pre-clinical studies.

Sorry, I may have missed something you mentioned earlier. What about like PCV and PPV [listings]? What's the status of the research right now?

We have already filed the IND with the clinical study application with Chinese SFDA early this year. And currently, we're still expecting the approval to conducting the clinical studies.

So you're waiting for the approval from --?

From Chinese SFDA.

So you're waiting for approval, right?

Yes, for conducting the clinical studies.

Okay, thank you. So also my last question is regarding your M&A strategy. Do you expect any M&A in, let's say, coming quarters?

I probably invite Mr. Yin to answer that question.

(Interpreted). If we want to execute an M&A deal, definitely a constraint is coming from the cash. So currently, the cash we have is $94 million. We think this is sufficient to complete our current research program and to fund into our setting up the new plant for our new vaccines. But if we complete all these things, we probably don't have too much cash left on hand.

In the past few years, we always want to find some opportunities for merger and acquisition. However, the capital market in China do give it very high [trading multiples]. Therefore that we don't think there is a lot of opportunity to acquire any business in China. But we think recently, the Chinese Government is trying to increase the GMP standards to upgrading the quality requirements. And therefore, this will grant the opportunity to maybe some -- maybe there we are having some opportunities to arise.

And also, we recently saw that the Chinese capital market started to be cooling down, and we think that will also offer the opportunities as well. However, management currently don't have a clear target. And also, our performance, our share price performance is not as good as we expected. Therefore, we don't plan to acquire the business through financing.

But we think if we in China by any chance do find a good partner which can add product type or to contribute to the revenue, we think we definitely will be considering that opportunity. But how to execute it, we definitely make the decision within the management and the Board to be in the best interests of our shareholders.

Thank you.

Thank you for the very clear explanation. I'm sorry. I do have one last question. We saw both gross margin and operating margin are squeezing down this quarter. Could you help us understand better about how we should look at margins going forward in the last two quarters?

Thank you.

: Well, actually, as we are moving along to expanding our public market, we do foresee the lower average selling price happening on our hepatitis A vaccine. But as you may know that once we are expanding our public market, we do also require less spending on marketing activities. Therefore, we don't think there's a significant impact on our bottom line if we are lowering the price for expanding to the public market.

But in terms of gross profit margin, we do expect a lower margin. On the one hand side it's from the lower price, but also we saw that the increase of costs from the -- when we were running business in China as well facing a high inflation rate, But also as we are taking a conservative approach to making our financials, we did include a lot of provisions from the inventories, and also the added capacity. The lower utilized capacity that we have for our both hepatitis plant and our flu vaccine.

Thank you. I will go back to the queue.

(Operator Instructions). Bin Li, Morgan Stanley.

Christopher Lu calling on behalf of Bin Li. Can you tell us what we're seeing so far in the fourth quarter in terms of gross margin? And also, the AR status for the Company and also the industry?

Thank you.

Thank you, Chris. I will invite Mr. Yin to answer your question.

(Interpreted). We expect that we will have a regular quarter in the fourth quarter, and also, our sales will be realized in Anflu. And that's why we expect that for the annual revenue expectation, we expect that it will be in the range of $38 million to $40 million.

In order to answer the question regarding to the accounts receivable, if we are looking at our cash position, actually, the cash we have currently is similar to actually a little bit more than the cash we have end of second quarter. And we actually didn't increase too much in our bank loan. So maintaining the cash is mainly from the improved AR collection.

And last year, our date of AR collection is over 330 days, but in first nine months this year, it's about 220 days. And for the gross margin in the fourth quarter, we expect it to be in line with the third quarter level.

I see. Thank you very much.

We have come to the end of our allotted time for question and answer session. I would now like to turn the call back to management for closing comments.

Well, thank you for joining us today, and we are also aiming to updating our progress in our developments on EV71 vaccine in the coming months. And also, we are about to presenting on the Company in the Cowan's conference tomorrow, and also Pipe Jaffray conference at the end of this month. And we are expecting -- we expect to see some of you in those events. And thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.